Why $40 Silver Can Happen This Year

May 3, 2013 at 07:38

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Don’t let the lackluster showing for silver prices in 2013 fool you – things are about to change.

Indeed, the white metal’s performance so far has been uninspiring. Silver prices ended April down $4.14 an ounce, or 14.6%, at $24.42 an ounce, marking the third consecutive month of declines. The metal was little changed in March, trimmed by just $0.10. In February, silver shed $2.92. In January, it gained a modest $1.12.

Weighing on the white metal is record stock market rallies. In Q1, the Dow gained 11%, booking its best first quarter since 1998. The Standard & Poor’s 500 Index soared 10%, and the Nasdaq was up 8%. The Dow and the S&P have gone on to hit fresh records on numerous occasions, and the Nasdaq rests at its best level since 2000.

The situation in Cyprus is also pressuring silver. Word the Cypriot government must sell 400 million euros of its excess gold reserve to raise $13.2 billion (as part of its bailout deal) sent precious metals reeling. Since Cyprus is the fifth Eurozone nation to seek a bailout, concerns are other European governments may follow suit.

Down about $6.00 an ounce, or 20%, this year, the slump presents a buying opportunity.

Investing now in beaten down silver could prove very rewarding. The silver market looks poised to repeat the 170% gain logged over the seven-month period between April-November 2011.

“Because the global silver market is relatively small, silver prices tend to be more volatile; the pounding selloff we witnessed in silver this past month is a testament to that fact. But volatility works both ways, so when silver rises, its prices can explode higher,” said Krauth.

Amid silver’s swoon, savvy investors pounced. Robust physical global demand sent silver off its April 19 low of $22.96, and set a floor under prices.

Dealers reported depleted stock and continued frenzied demand.

In fact, thanks to the recent sell off in gold and silver, a buying frenzy for bullion crashed Websites, jammed phone lines and dried up inventory.

“Our Website was overloaded for the first time ever Friday and Monday. Every phone line was lit up. We did seven times our normal volume,” according to Jake Haugen, VP of sales for Texas-based Provident Metals.

Bargain hunting and pent-up demand sent sales of American Eagle silver coins soaring. The tally for April was 4,087,000, a 21.8% increase from March and a whopping 168.9% increase from April of last year. Sales of the bullion coins stand at 18,310,000 year-to-date, a level never reached so early in any year.

In 2012, it wasn’t until July 16 the silver coins surpassed the 18.3 million mark.

As the global economy stabilizes and moves forward, the Thomson Reuters GFMS World Silver Survey 2013 reports industrial demand should hit a three-year high this year.

“The fact that we have global growth accelerating into next year means we should get a relatively strong response from industrial demand,” Neil Meader, GFMS head of precious metals research and forecasts said during the presentation of the report’s release. “Stock replenishment could give [silver] a decent bounce.”

The United States and China by far consumed the most silver for industrial applications in 2012, the report showed.

Several factors should cushion silver prices including lingering U.S. budget and deficit problems, a possible U.S. credit rating downgrade, worldwide economic woes, loose global monetary measures and the real threat of inflation.

“Though we have not seen inflation as a problem, yet, that does not mean that it is not going to happen,” Meader added.

The recent rash of silver selling came from a small aggressive bunch, and doesn’t represent the broader view.

While GFMS scaled back a bit its gold and silver price forecasts, it still sees substantial upside for silver. For the second half of the year, Meader says a considerable rally could propel silver prices to $30-$32 an ounce.

Silver’s next stop could be $40 by the end of the year, $60 by the end of 2014, and much higher after that.